EGT1 Task 3
To: Company G CEO
Date: February 20, 2013
Re: Comparing Company G against industry average
The first ratio calculated was current ratio. This is done by dividing current liabilities by current assets. Current ratio is important because it shows the business’s ability to pay back the current liabilities with the current assets that they have available to them. At the end of 2011, the current ratio was at 1.86. In 2012, this ratio dropped to 1.80. The industry ranges from 3.1 (showing a strong ability to pay back liabilities) to 1.4 (showing a weak ability to pay back liabilities) with a median of 2.1. Company G is below the median showing a weakness in this category.
Next we calculated acid test ratio. This is computed by available cash …show more content…
plus accounts receivable plus short-term investments divided by current liabilities. This calculation will show us if the business could pay all of their current liabilities if they all came due at once. In 2011, the acid test ratio was 0.64. At the end of 2012, it dropped to 0.44. This is showing a major weakness due to the fact that the industry averages from 1.6 (strong) to 0.6 (weak). Company G is well below industry averages.
Inventory turnover was the next ratio calculated. This is done by calculating the cost of goods divided by average inventory. This calculation is basically measuring the amount of times a business sells its products (inventory) in a given year. A low rate of turnover will show difficulty in selling their inventory with a high rate of turnover showing ease in selling their inventory. In 2011, the inventory turnover ratio was 6.1. This ratio dropped to 5.2 in 2012. This is a major weakness with industry averages ranging from 13 to 8.3 This could be due to the high price of the cost of goods being sold.
The next ratio calculated was accounts receivable turnover. This ratio is measuring the ability of the company to collect cash from their credit customers. It is accomplished by dividing net credit sales by average net accounts receivable. In 2011, the ratio was 32.2. In 2012, it dropped to 30.6. Compared to the industry averages of 35.2 (strong) to 31.4 (weak), company G is weak in this category as well. This ratio coincides with inventory turnover. If Company G can raise inventory turnover ratio, they may be able to raise accounts receivable ratio.
Days’ sale in receivables for 2011 was 11.1. This ratio rose to 11.9 in 2012. This ratio is also measuring the ability of the business/company to collect account receivables but it lets us know how many days’ sales remain in the accounts receivable. This is computed by dividing net sales by one year or 365 days to be exact(which gives us one day’s sales); then dividing average net account receivables by one day’s sales. The industry strong average is 15.1 and weakness is 11.3. At 11.9, I would say Company G shows a strength in this category.
Debt ratio was the next variable calculated. In 2011, it was at 28.34%; by 2012, it raised to 29.46%. Debt ratio is figured out by taking total liabilities and dividing it by total assets. This basic equation will show us the proportion of assets financed with debt or liabilities. When dealing with debt ratio, the higher the number equals higher risk. For example, a debt ratio of 1 means that all of the assets are financed by debt whereas a ratio of 0 means none of the assets were financed by debt. So, obviously, a company would want a low debt ratio. The industry average ranges from 30.0 to 66.0%. Company G is well below the average which shows strength in this category. This means that most of Company G’s assets are not financed by debt.
Times-interest-earned ratio was the next calculated number.
This is done by dividing operating income by interest expense. This ratio measures the amount of times operating income can pay for interest expense. A high ratio shows that the company can easily pay interest expense. In 2011, this ratio was 31.12. In 2012, this rose to 36.15%. Industry averages are 8.1 to 29.7%. Company G shows strength in this category as well meaning Company G does well generating income to pay its interest bearing expenses.
The next calculated ratio was rate of return on net sales. This was done by dividing net income by net sales. This ratio is simply showing us the percentage of each sales dollar earned as net income. In 2011, Company G’s ratio was 5.43%. By 2012, this rose to 6.35%. The industry average is 7.55 to 4.20%. At 6.35%, I would say Company G should have no concern in this category; they are above the median but below the high.
The rate of return on total assets is the next ratio. This is calculated by taking net income and adding interest expense; then dividing them by average total assets. This ratio measures a business’s success in using their assets to earn a profit. In 2011, the ratio was 12.30% and in 2012 it was 14.28%. This was a pretty good rise and sits well with the industry averages of 17.20 to 8.60%. I would say this is a strength as well for Company …show more content…
G.
The rate of return on common stockholder’s equity in 2011 was 20.20% and 19.24% in 2012.
This is calculated by subtracting preferred dividends from net income and dividing by average common stockholders’ equity. This basically shows the income earned for each dollar invested by common shareholders. The industry average is 18.6% to 12.80%. Company G represents a financial strength in this category.
The next category is earnings per share of common stock. This is computed by taking preferred dividends and subtracting it from net income; then dividing that by number of shares of common stock outstanding. In 2011, this ratio was 0.672 and in 2012 it rose to 1.08. The industry average was 0.9 to 0.83. I would say company G has strength in this category compared to average. Companies should strive to increase this number by 10% each year.
Price earnings ratio is calculated by dividing market price per share of common stock by earnings per share. This ratio shows the market price of one dollar of earnings. In 2011, this ratio was $5.21 and in 2012 it rose to $5.32. The industry average ranges from 7 to 5.5. At $5.32, I would say company G shows weakness in this
category.
Book value per share of common stock is computed by subtracting preferred equity from total stockholders’ equity, then dividing by number of shares of common stock outstanding. The industry average ranges from 6 to 4.9. In 2011, this ratio was $4.25 and in 2012 it rose to $5.90. Many investors prefer lower numbers in this category meaning Company G shows strength.
Horngren, C. T., Harrison, W. T., Jr, W. T., & Oliver, M. S. (2008). Accounting 8th edition. Prentice Hall
Yahoo finance. (n.d.). Retrieved from http://finance.yahoo.com/q/in?s=HD Industry
Date: February 20, 2013
Re: Comparing Company G against industry average
The first ratio calculated was current ratio. This is done by dividing current liabilities by current assets. Current ratio is important because it shows the business’s ability to pay back the current liabilities with the current assets that they have available to them. At the end of 2011, the current ratio was at 1.86. In 2012, this ratio dropped to 1.80. The industry ranges from 3.1 (showing a strong ability to pay back liabilities) to 1.4 (showing a weak ability to pay back liabilities) with a median of 2.1. Company G is below the median showing a weakness in this category.
Next we calculated acid test ratio. This is computed by available cash …show more content…
plus accounts receivable plus short-term investments divided by current liabilities. This calculation will show us if the business could pay all of their current liabilities if they all came due at once. In 2011, the acid test ratio was 0.64. At the end of 2012, it dropped to 0.44. This is showing a major weakness due to the fact that the industry averages from 1.6 (strong) to 0.6 (weak). Company G is well below industry averages.
Inventory turnover was the next ratio calculated. This is done by calculating the cost of goods divided by average inventory. This calculation is basically measuring the amount of times a business sells its products (inventory) in a given year. A low rate of turnover will show difficulty in selling their inventory with a high rate of turnover showing ease in selling their inventory. In 2011, the inventory turnover ratio was 6.1. This ratio dropped to 5.2 in 2012. This is a major weakness with industry averages ranging from 13 to 8.3 This could be due to the high price of the cost of goods being sold.
The next ratio calculated was accounts receivable turnover. This ratio is measuring the ability of the company to collect cash from their credit customers. It is accomplished by dividing net credit sales by average net accounts receivable. In 2011, the ratio was 32.2. In 2012, it dropped to 30.6. Compared to the industry averages of 35.2 (strong) to 31.4 (weak), company G is weak in this category as well. This ratio coincides with inventory turnover. If Company G can raise inventory turnover ratio, they may be able to raise accounts receivable ratio.
Days’ sale in receivables for 2011 was 11.1. This ratio rose to 11.9 in 2012. This ratio is also measuring the ability of the business/company to collect account receivables but it lets us know how many days’ sales remain in the accounts receivable. This is computed by dividing net sales by one year or 365 days to be exact(which gives us one day’s sales); then dividing average net account receivables by one day’s sales. The industry strong average is 15.1 and weakness is 11.3. At 11.9, I would say Company G shows a strength in this category.
Debt ratio was the next variable calculated. In 2011, it was at 28.34%; by 2012, it raised to 29.46%. Debt ratio is figured out by taking total liabilities and dividing it by total assets. This basic equation will show us the proportion of assets financed with debt or liabilities. When dealing with debt ratio, the higher the number equals higher risk. For example, a debt ratio of 1 means that all of the assets are financed by debt whereas a ratio of 0 means none of the assets were financed by debt. So, obviously, a company would want a low debt ratio. The industry average ranges from 30.0 to 66.0%. Company G is well below the average which shows strength in this category. This means that most of Company G’s assets are not financed by debt.
Times-interest-earned ratio was the next calculated number.
This is done by dividing operating income by interest expense. This ratio measures the amount of times operating income can pay for interest expense. A high ratio shows that the company can easily pay interest expense. In 2011, this ratio was 31.12. In 2012, this rose to 36.15%. Industry averages are 8.1 to 29.7%. Company G shows strength in this category as well meaning Company G does well generating income to pay its interest bearing expenses.
The next calculated ratio was rate of return on net sales. This was done by dividing net income by net sales. This ratio is simply showing us the percentage of each sales dollar earned as net income. In 2011, Company G’s ratio was 5.43%. By 2012, this rose to 6.35%. The industry average is 7.55 to 4.20%. At 6.35%, I would say Company G should have no concern in this category; they are above the median but below the high.
The rate of return on total assets is the next ratio. This is calculated by taking net income and adding interest expense; then dividing them by average total assets. This ratio measures a business’s success in using their assets to earn a profit. In 2011, the ratio was 12.30% and in 2012 it was 14.28%. This was a pretty good rise and sits well with the industry averages of 17.20 to 8.60%. I would say this is a strength as well for Company …show more content…
G.
The rate of return on common stockholder’s equity in 2011 was 20.20% and 19.24% in 2012.
This is calculated by subtracting preferred dividends from net income and dividing by average common stockholders’ equity. This basically shows the income earned for each dollar invested by common shareholders. The industry average is 18.6% to 12.80%. Company G represents a financial strength in this category.
The next category is earnings per share of common stock. This is computed by taking preferred dividends and subtracting it from net income; then dividing that by number of shares of common stock outstanding. In 2011, this ratio was 0.672 and in 2012 it rose to 1.08. The industry average was 0.9 to 0.83. I would say company G has strength in this category compared to average. Companies should strive to increase this number by 10% each year.
Price earnings ratio is calculated by dividing market price per share of common stock by earnings per share. This ratio shows the market price of one dollar of earnings. In 2011, this ratio was $5.21 and in 2012 it rose to $5.32. The industry average ranges from 7 to 5.5. At $5.32, I would say company G shows weakness in this
category.
Book value per share of common stock is computed by subtracting preferred equity from total stockholders’ equity, then dividing by number of shares of common stock outstanding. The industry average ranges from 6 to 4.9. In 2011, this ratio was $4.25 and in 2012 it rose to $5.90. Many investors prefer lower numbers in this category meaning Company G shows strength.
Horngren, C. T., Harrison, W. T., Jr, W. T., & Oliver, M. S. (2008). Accounting 8th edition. Prentice Hall
Yahoo finance. (n.d.). Retrieved from http://finance.yahoo.com/q/in?s=HD Industry